|Course 405: Sector-Fund Investing|
|A Few More Questions|
In addition to the questions you would ask about performance, risk, portfolio holdings, management, and costs before buying any fund, ask two more questions that apply specifically to sector funds:
How diversified is it?
As we explored earlier, some sector funds are quite concentrated. It's therefore important to know if the fund favors certain subsectors and totally disregards others.
To get some idea of a fund's diversification, you can check its weightings, holdings, and concentration (how much of its assets it has in its top 10 holdings) in the portfolio section of its fund report page on Morningstar.com In addition, you should examine the fund's shareholder report and read its prospectus.
Does it charge a redemption fee?
Sector funds very often charge redemption fees if you sell the fund within a certain period of time from purchase. Redemption-fee information appears in the expenses section of our fund reports.
As a long-term investor, you shouldn't get hung up on redemption fees, though. In fact, think of them as your friends. The fees penalize people who invest for less than a set period of time (often three months, but sometimes a year or more). Basically, they are penalties for early withdrawal that are paid back into the fund rather than to the fund company. Funds use these fees to deter investors who rush into hot funds, then flee when they turn cold. These shareholders can undermine a fund's performance with untimely buying and selling.
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